I. COMMERCIAL OVERVIEW (EXECUTIVE SUMMARY) Overview of Import Market Romania offers a large and diversified potential market for all forms of Western goods and services. However, the severe shortage of hard currency has impaired the country's purchasing power. The dissolution of the Comecon market, the dramatic increase in the cost of essential energy imports, as well as the direct and indirect costs of supporting UN sanctions against Iraq and Serbia (two of Romania's traditional trade partners) have strongly affected Romania's ability to earn the hard currency needed to conduct more active trade with the West. In spite of this, the enormous pent-up demand for modern capital goods has made imports of machinery, mechanical goods and electronic equipment double in value in 1991-93. Many of these imports were destined for the energy sector. Energy imports constituted about 25 percent of the country's imports in 1993. Substantial imports were also made for the upgrading of Romania's infrastructure, with emphasis on the modernization of telecommunications and of such vital segments of the transportation system as civil aviation and motorways. Although having a potentially powerful agricultural sector, Romania has been, since 1990, a net importer of food and agricultural products, with prepared food, oils, vegetable products and livestock comprising almost 15 percent of all imports in 1993. Imports of consumer goods have also grown very rapidly. Since 1989, Romania's trade balance has constantly registered deficits. In 1993, the deficit amounted to USD 1,629.5 million. Deficits envisioned by trade projections average about 4 percent of GDP in 1994-96, and decline thereafter to about 1 percent of an expanding GDP at the end of the decade. Substantially higher import rates in the foreseeable future will be largely offset by better exports. According to World Bank findings, exports, aided in the near term by an appropriate exchange rate policy, are projected to grow by 4-6 percent yearly to the end of the decade. The pattern of Romania's major trade partners has changed dramatically since 1989. The countries of the European Union (EU) and the European Free Trade Association (EFTA) are now by far Romania's most important trade partners. About 42 percent of Romania's imports were purchased from EU countries in 1993, sharply up from only 13 percent in 1989. Within the EU, Germany conducts the largest volume of trade with Romania. These increases in trade shares have occurred largely at the expense of the trade shares of former Comecon partners, which still, however, account for about 25 percent each of Romania's exports and imports. In 1993 the United States ranked sixth among the largest exporters to Romania, after Germany, Russia, Italy, Iran and France. Romania remains the region's third-largest market for U.S. products, behind Poland and Hungary. As Romanian industrial development accelerates and trade expands, an improving market for more sophisticated products is foreseen which generally favors U.S. companies. Synopsis of Commercial Environment Since 1989, the Romanian Parliament has passed a large volume of legislation establishing new institutions and the fundamental statutory framework needed to govern public and private activities in a free market setting. Central planning has been abolished, and the powers of ministries in commercial affairs curtailed. New fiscal and monetary institutions and practices have been developed. Price setting has been largely liberalized and a new tariff code adopted. Private sector development has been encouraged. The housing stock has been largely privatized and so has most agricultural land. A framework for the privatization of industry has been established. According to GOR sources, massive privatization in this sector is scheduled to begin in the fall of 1994. The Romanian land reform measures have contributed decisively to the expansion of the private sector: practically overnight, over 80 percent of the arable land was returned to former owners or heirs, and agricultural output became largely dominated by the private sector. Farm land privatization has created a new set of challenges. Farm sizes are now very small, holdings are fragmented, and there are a large number of urban dwelling land-owners. Land titling is, moreover, proceeding slowly, with only about 15 percent of the arable land now covered by recognized titles. Without titles, the new owners cannot easily sell their land nor use it as collateral for bank loans. Nevertheless, they represent significant potential purchasing power for agricultural equipment in the future. The industrial sector has been characterized by declining sub- sectors, mostly energy-intensive heavy industries, coupled with sub-sectors with strong potential for growth, for the most part light industries with an export orientation. The shakeout of uncompetitive activities is expected to deepen as the stabilization program proceeds, and as stricter financial discipline is imposed on enterprises. In the longer term, Romania's industrial sector, with its very heavy concentration in machine-building, chemicals and metallurgy, is likely to undergo further relative downsizing. In this scenario, industry is projected to grow slowly in the next three years. Nevertheless, revamping and modernization will be taking place in the stronger entities which will represent an important export potential for Western companies. The services sector is still comparatively small in Romania, contributing 32 percent of GDP. The newly emerging private companies are imparting new dynamism to the service sector, particularly in retail trade, hotels and restaurants, tourism, banking/insurance, legal advice, and healthcare. This trend can be expected to accelerate, as the demand for services, which is highly income-elastic, strengthens. Services are expected by World Bank's conservative projection to grow by 2.2 percent per year in 1994-96, gradually accelerating to about 6 percent; services are then expected to raise their contribution to GDP by 14 percent, to 46 percent at the end of the decade. Across the economy, the number of private businesses has seen an explosive growth, to almost 525,000 at end-1993. About 60 percent of these are registered as commercial companies with the remainder being individual or family businesses. The typical private company set up during 1990-93 is a limited liability company, devoted primarily to conducting domestic trade or import/export activities. Potential distributors will be found emerging in this developing nucleus. One of the first steps taken by GOR after the revolution was the liberalization of foreign trade, which formerly had been the monopoly of some 30 state-owned organizations. Both private and state-owned companies are now free to make their own business decisions and to import or export directly, without the help of middlemen. This positive development is, however, accompanied by some aspects that have a restrictive influence: -- Obtaining information on the market is difficult due to its complexity and rapidly changing patterns. Published market research and statistical data is discouragingly poor; -- The wholesaling and retailing systems are far from being completely and solidly structured; -- The private limited liability companies engaged in import- export activities have few partners and low capitalization. Shortage of capital, limited collateral, and lack of experience channels entrepreneurs towards such activities as trade and services, where initial investments are low and returns can be made rapidly. These drawbacks, while being a potential hindrance to doing business, do not offset the profitability of entering the Romanian market. However, they do highlight the fact that marketing products and finding local partners are often difficult and time-consuming undertakings under the current economic circumstances in Romania. Over the last few years, Romania has made significant progress in bringing its trade regulations and standards in line with international practices. This process received considerable support from Romania's membership in such international arrangements as GATT and major conventions on property rights protection, as well as from Romania's association with EU and EFTA countries and its Trade Agreement and Investment Treaty with the United States. Encouraging foreign investment has been one of GOR's main concerns. It has repeatedly fine-tuned legislation so as to better highlight such positive elements as national treatment, up to 100 percent foreign ownership of enterprises, full repatriation of after-tax profits, and considerable tax incentives, including 2-5 year tax holidays and reductions in succeeding years. Although the amount of foreign investment in Romania has not kept pace with expectations (total direct investment being only about USD 900 million by mid-1994), a positive trend has been noticed of late, with larger investment being made in manufacturing industries and the banking system. Trade and project financing in Romania continues to be difficult. While it is true that making straight imports of Western goods has become easier as considerably higher amounts of hard currency are now in the hands of Romanian companies, state-owned and private, it is also true that this applies especially to smaller imports, mainly of food products and consumer goods. Imports for large projects, as well as imports of capital goods and advanced technology needed for the restructuring and rehabilitation of the country's industry are largely dependent on the availability of multilateral lending, export credit guarantees, and supplier credits. Business Attitude Toward the U.S. The general Romanian perception of the excellence in quality of U.S. products accounts for much of the American's reputation as being the ideal partner. Because Romanians have been denied access to anything American for a long time, U.S. products are often not as well known as comparable products from European or even Asian sources. This is an obstacle to increased Romanian imports of American goods and services. Another limiting factor is the lack of awareness U.S. firms have for opportunities in Romania and a reluctance to invest time for investigation of a little known market. Romanians understand this and are anxious to make visitors from U.S. companies welcome. Until recently, opportunities for U.S. traders and investors were hampered by both Romania's lack of hard currency and the absence of the appropriate legal framework governing bilateral trade relations. The situation has now changed. The U.S.-Romanian Trade Agreement, which went into effect in early November 1993; the Bilateral Investment Treaty, which was ratified in early 1994; and the availability of GSP for Romania as of March 1994 -- all have paved the way for a stable bilateral economic and commercial relationship. A change in the structure of U.S. exports to Romania, with manufactured goods claiming a larger share, can be expected to occur in the near future as a result of the restoration of MFN tariff status. While MFN basically enhances Romania's export potential to the U.S. through reduction in tariffs (affecting most particularly textiles, apparel, leather goods, furniture, glassware and some other light industries), the increase in Romania's hard-currency earnings will facilitate factory modernization and expansion projects, thus enhancing U.S. export potential for equipment, technology, and services. Due to the excellent reputation enjoyed by U.S. companies, the United States has a good chance now of achieving a stronger presence in Romania in both trade and direct investment. Major Business Opportunities A) The following sectors, which the Romanian government has slated for priority development or restructuring and modernization, will offer major business opportunities through the end of the century, particularly for joint-venture and co- production arrangements, but also for straight exports of specific items: -- Aircraft and avionics (commercial passenger jet aircraft, aircraft parts, airborne avionics); -- Telecommunications equipment (network switching and transmission equipment, broadcast equipment, microwave equipment, cable distribution networks, cellular telephony, data transmission equipment); -- Power generation equipment (steam turbines, generators for steam turbines, generators for water turbines, boilers); -- Computers and peripherals (high-performance PC's, LAN's); -- Oil and gas field machinery (offshore oil exploration/ exploitation equipment, oilfield equipment, gas exploration equipment); -- Mining equipment (extraction/processing equipment, open pit mining equipment, mine safety equipment); -- Food processing and packaging equipment (grain mill products processing equipment, meat and poultry processing equipment, fruit and vegetable processing equipment, bottling and container packaging equipment); -- Agricultural chemicals (fertilizers and pesticides); and -- Agricultural machinery (tractors up to 20 HP, tractors up to 45 HP, cultivators, engines and parts of harvesting combines, irrigation equipment). B) Among the over 100 major projects for which the Romanian government has already finalized documentation and which are on Romania's public investment project list for the next 10-15 years, the most promising for Western participation will be found in the field of transportation (road rehabilitation, motorway construction program, bridge construction over the Danube, upgrading of the Constantsa seaport, railway restructuring, airport modernization); telecommunications (digital overlay network, GSM cellular telephone system, upgrading of local distribution networks); power generation and transmission (completion of Unit No. 2 of the Cernavoda nuclear power plant, new district heating plants at several locations, upgrading of transmission system connections to the Black-Sea-area grid); oil production/petrochemistry (refinery upgrading program, oil and gas transmission and dispatching system, crude oil and LNG terminal in Constantsa); mining (lignite and bituminous coal mine rehabilitation and expansion); and pollution control (mainly at copper and lead extraction and processing plants). C) As regards market openings, the most important developments are expected to be seen in the services sector. Tourism services (mainly hotel and restaurant services and leisure activities), banking/insurance services, computer software for business applications, legal and financial advice, advertising and media development -- all of these areas offer ample room for Western-type upgrading. Other emerging markets are those for products linked to improving living standards. Modern healthcare equipment, products, and services; household consumer durables; building materials (particularly for insulation and better finishing) have aleady started to show good potential on the Romanian market. In the industrial area, the most important market opening will be the one for environmental technologies and services. Major Obstacles to Doing Business Romanian legislation does not contain any provisions which could be regarded as directly prejudicing foreign business or investment in this country. On the contrary, foreign trade is strongly encouraged and the climate for foreign investment, which is seen as a vital factor for the country's progress, is quite attractive. There is no specific discrimination against U.S. business. However, a potential obstacle for U.S. exporters is the specter of preferential tariff treatment for Western European competitors. In December 1992 Romania joined the EFTA and in early 1993 it signed an association agreement with the EU. This agreement stipulates a ten-year period for Romania's adapting to European economic-commercial standards. To ease the association process, an interim agreement allowing for an early implementation of commercial collaboration with the EU was also signed, and became effective on May 1, 1993. As of that date, when also the agreement with the EFTA countries entered into force, a new Romanian import tariff schedule was introduced. According to this schedule, a large number of products originating in the 12 EU and 7 EFTA member countries enjoy preferential tariffs, thus being more competitive on the Romanian market than imports from the United States. U.S. companies will be increasingly disadvantaged until a more equitable treatment can be worked out. Except for the above-mentioned hindrance, no other conditions in Romania can be looked upon as specific trade/investment barriers. Of course, Romania's transition to a market economy, with its inevitable structural and systemic disruptions, does not make for an ideal commercial environment. The difficult marketing conditions, the poor quality of the product distribution network, the unsatisfactory functioning of the banking system, the inadequate infrastructure for doing business -- all of these are irritants for the U.S. company used to a system which is highly conducive to business. However, these very shortcomings pose a challenge for businessmen, inviting them to be resilient, aggressive, and creative, and prompting them to contribute to the improvement of the commercial environment while staying in the market and reaping the benefits of their pioneering efforts. Nature of Local and Third-Country Competition U.S. companies doing business in Romania can expect competition from both local manufacturers and foreign, mostly Western European, suppliers. Romanian industry is very capable in many equipment manufacturing and light industry fields and, therefore, may present serious competition to some U.S. products. The equipment manufacturing sectors in which local competition will be strongest include agricultural machinery, oil and gas field machinery, and power generating equipment. Third-country competitors are strongest in the following sectors: aircraft and parts (France, U.K.), tele- communications equipment (France, Germany, Spain, South Korea, Italy, and Japan), computers and peripherals (Hong Kong, Germany, France, Arab Emirates, Korea, Singapore, Japan, and China), electric power systems (Italy, Germany), mining equipment (Poland and Russia), food processing and packaging equipment (EU countries, generally, Turkey, Syria and Lebanon), and agricultural machinery (U.K., Austria), In the agricultural produce sector, competition to U.S. exports will generally come from South America (for soybeans, soybean meal, and poultry meat), and from such countries as Egypt, Turkmenistan, and China (for cotton). In spite of local and third-country competition, U.S. products, with their traditional reputation for high quality and reliability, will have very good chances on the Romanian market, especially if they incorporate modern, state-of-the- art technology. In the current stage of Romania's economic restructuring effort, product quality is the most important criterion in purchasing decision-making.